Abstract
This study examined the effect of financial sector development on capital formation of Nigeria and South Africa using time series data from 1987-2019.Time series data was sourced from Central Bank of Nigeria Statistical bulletin and World Bank data base. percentage of capital formation to gross domestic products was used as the function of credit to private sector, broad money supply, interest rate spread and market capitalization ratio. Ordinary least square methods of cointegration, granger causality test, unit root test and Vector error correction model. The study found that the financial sector development explained 64.1 percent variation in Nigeria capital formation as against 46.4 percent variation from South Africa; this implies that the variables have more explanatory powers in Nigeria than South Africa. From Nigeria, the study conclude that credit to private sector have positive and significant effect, interest rate spread have negative and no significant effect while money supply and market capitalization ratio have positive and significant effect on Nigeria capital formation. However, from south Africa, credit to private sector have negative and no significant effect, interest rate spread have positive and significant effect, money supply have positive and no significant effect while market capitalization ratio have positive and significant effect on south African capital formation. It recommends that the need to increase the size of the markets in both countries by increasing the number of financial instruments available to investors so as to increase trading as well as improve liquidity in the markets and government effort to increase the operational efficiency of the financial sector; the banking habit shall be increase and banking density reduced through effective branch banking policies to enhance effective savings mobilization and credit allocation that will bridge the wide savings-investment gap in the economy
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